Public Finance

§ 1. The taxation of goods at the frontier or on passing a fixed boundary line—what is known in England as the customs revenue—is far older than the system of internal duties. Almost from the origin of commerce we can find traces of its employment, and can note its gradual development into an important source of state income. Nor has it as yet lost much of its prominence. Notwithstanding the great increase of other branches of taxation, customs are still a conspicuous part of nearly every national budget, and in some countries are regarded as the only convenient mode of levying dues on consumption.
*78

The most primitive form of this kind of taxation is probably that known as a transit duty, imposed on goods passing through a district. Modern African travellers have made us familiar with the I ‘gifts’ demanded by each petty chief in return for leave to go through his country, an exaction which in the trader’s case is practically a tax on the wares that he carries. How natural such a system is its revival in the earlier Middle Ages shows. In that disorderly condition of society each lord or
seigneur asserted his right to charge dues on goods in passage, basing his claim on the services that he rendered by keeping the roads, bridges, and water-ways in fit condition, and by protecting the trader against violence. The collection of the tolls was, however, far more regular than the performance of the corresponding services, and therefore the first efforts of reviving commerce and increased royal power were directed towards the curtailment of such vexatious dues, which were either abolished or confined to payment for actual service done.
*79 The use of transit duties was, however, continued in state taxation, and they have only been given up in the present century.

Next in historical order comes the export duty, levied on commodities as they leave the State’s territory. The reasons for the employment of this kind of duty in early times can hardly be adequately appreciated, without considering the differences in economic beliefs and conditions. By taxing exports it was thought that the foreigner was made to pay a high price for native wares, or at worst that a more abundant supply was kept for the home consumer. Even if the burden should fall on the native producer, the article taxed was generally an important one, and its proprietors were bound to contribute to the public revenue. In fact the export duty is often a mitigation, introduced in the interests of the Exchequer, of the more rigorous prohibition of export.

The field of action for export taxes has been greatly diminished by the influence of the mercantile system,
*80 which, looking on exportation as advantageous, was naturally hostile to anything calculated to restrict it. The few exceptions that it admitted for special reasons
*81 have since been removed by the change in commercial policy, so that the use of export duties is now on a very limited scale.

The decline of the older forms of customs taxation has not affected the import duties, which indeed have come to be regarded as synonymous with the customs. The complete abolition of duties on exports would hardly affect the finances of European States, but anything that disturbed the revenue from imports would be the cause of grave concern to nearly all nations.
*82 Though probably of somewhat later origin than transit or export dues, duties on imports were well established at an early period. They were employed under the Roman Empire, with separate customs lines or points for each province,
*83 but the rates were moderate, not exceeding five per cent.
ad valorem. The break-up of the Empire brought back the ruder state of things already described, and it was not until the royal authority became somewhat firmly established that duties on imports were effectively levied. The cities exercised the power of taxing goods, each in its local market and the adoption of this course had in many cases the same effect as the imposition of an import duty, but the great agency in the development was the expansion of the king’s administration. England supplies the earliest example with its ‘customary’ dues on wine, accompanied by the heavy tax on exported wool.
*84 Other European countries followed the same course. France,
e.g. adopted import taxation at a later date, export and transit dues being at first more prominent. As trade increased, and as the desire of encouraging national industry took a firmer hold, resort to import duties became more frequent. The rise of mercantilism, discernible in England from the time of the Tudors, and in France from the sixteenth century,
*85 supplied a fresh force in favour of this form of taxation, while it tended to lower its financial importance in comparison with its use in assisting native producers against their foreign competitors.

Amongst the great services that Adam Smith performed for the cause of sound finance, his establishment of the true function of import duties was undoubtedly one. His vigorous attack on their employment as an instrument of economic policy helped materially to bring out their true use as a fiscal agency. To gain a large revenue and at the same time protect native industry from the entry of foreign goods was, he plainly showed, impossible.
*86 The revenue duty is not protective, and the protective duty is not revenue-yielding. The influence of Adam Smith’s teaching on administrators, and the need of revenue in consequence of increasing outlay, have led to at least a partial recognition of the financial aims of import taxation. Even in countries that adhere to a rigid system of protection, some of the duties are solely productive of revenue, and in all, the financial aim crosses and modifies the political one. A great deal of the modern protectionist revival is really due to the need of revenue to meet growing expenditure. The general adoption of a purely financial customs system with complete exclusion of all other aims, may be long deferred, but State requirements will always secure that the gaining of funds shall be one of the ends sought. The real danger lies rather in the probability of the methods employed being wasteful and unduly oppressive to the consumers.

§ 2. In order to understand the position of the customs in the fiscal system, it is essential to see that they are in reality a form or mode of collection, rather than a distinct branch of taxation. This point has been indicated before,
*87 but it is worthy of repetition. Whether a given commodity—say salt—is taxed directly in the possession of the consumer, or indirectly, either by excise supervision over the producer, by making the production a state monopoly, or, finally, by levying a duty at the frontier, is in one respect immaterial, as any of these methods secures taxation of consumption. The separate treatment of the customs is only defensible on historical and technical grounds. This fundamental unity of the various forms of taxation on consumption at once leads to the conclusion that most of the conditions governing the excise may be applied without hesitation to the customs. Thus the whole formation of the tariff should be determined by the parallel system of internal taxation, and the rates of duty in both should be exactly the same. No one has disputed the justice of imposing a customs duty where an excise one is already in force. To allow,
e.g. foreign spirits to enter duty free, while native ones paid heavily, would at once reduce the revenue and divert the normal course of industry. But exactly the same reasoning applies to the case of an import duty without an equivalent excise one. Expenditure is in this case also diverted, with the double evil of forcing some of the consumers to take what is in their opinion an inferior article and depriving the State of funds.

The problems of the excise as to the number of taxed articles and their selection reappear in connexion with the customs, though some modifying circumstances also occur. As regards the first, it is abundantly established that in order to secure productiveness only a small number of commodities should be taxed. This is best shown by the fact that in all countries the really productive articles are few in number. Before the restrictive system had been seriously altered in England (1839), five-sixths of the receipts came from nine articles. Forty years later (1880), three-fourths of the French customs revenue was raised on eight principal commodities; in 1900, more than half of it on four commodities: in 1887, corn, coffee, tobacco, and wine provided more than one-half of the German customs, and in 1899 corn, petroleum, and coffee performed the same service.
*88 The lesson of the excise is repeated in respect to the customs. It is further clear that more than a single article will have to be taxed. To secure the maximum of revenue with the minimum of friction, it is expedient to get a sufficiently broad field on which to operate. By this means the stability of the revenue is best secured. A particular commodity may fluctuate in its yield from year to year, but the general customs revenue can be made to annually approximate to a certain amount for a long series of years.
*89 The adoption of a pure revenue system greatly assists in the attainment of this desirable result.

The administration of the customs is relieved from one of the technical difficulties of the excise. Its treatment of all commodities is very much alike, and there is no interference with the work of production, or the development of industries; nevertheless other complications arise. The supervision of a long frontier is an arduous task, and where high duties are imposed, contraband trade can hardly be prevented. The more portable commodities are therefore not fitted to bear heavy duties, and, in fact, the limitation of taxation to products of distant countries, and to fairly bulky articles, would, from this point of view, be advisable. It has been suggested as a rule of fiscal policy that customs duties should, as far as possible, be placed only on those goods that are not produced at home.
*90 This, however, is hardly practicable, since, even where the exact commodity is not of native production, some available substitute is, and a tax that stimulates the use of substitutes is, in principle, as vicious as a protective duty. This problem arises in connexion with the English tea and coffee duties, but is not in their case of much practical weight.

The further questions as to the treatment of necessaries and raw materials must be answered in the same way as in the excise. Both are injurious, if they can be avoided, but the wants of the State may, as we saw,
*91 compel the taxation of such articles as salt and corn, in which case the customs system must levy its part on the tax. Taxes on raw materials, though they impede industry and raise prices unduly, may, on the whole, be the least vexatious mode of reaching a particular class that would not otherwise contribute its share. A tax on raw cotton might,
e.g. be the most effective and least irritating way of taxing the consumers of calico.
*92 In fine, the customs system requires to be thoroughly adapted to the conditions of the general taxation on consumption, of which it forms a part, and has besides to conform to the technical limits imposed by its constitution and mode of working. Productiveness, equity, and economy both with regard to the cost of collection and the loss imposed on the community are the ends to be realised, and of these, the first and last are the most important, as unfairness in the pressure of taxes on commodities can be rectified by alleviations in other parts of the tax-system.
*93

§ 3. The English customs system is remarkable for its rigorous adherence to the principle of purely financial duties. All traces of a political aim in the imposition of customs charges have now disappeared.
*94 This result has, however, been reached only as the result of a long development, during which other principles were operative. England, from its insular position and its stronger government, was more favourably situated than any continental State in respect to this form of tax. From being merely customary charges on wine and wool, the port duties expanded in the seventeenth century into a broader system. The receipts—derived from the general tax of five per cent. on all imports and exports, and the duties on wine, cloth, tobacco, silk, brandy—rose from £127,000, in 1604 to nearly £500,000, in 1641, and nearly £1,000,000, in 1688.
*95 After the Revolution they fell off, owing to the French war and the increase of duties to ten per cent., but by 1702 they came to £1,500,000.

All through the eighteenth century, war and the influence of the mercantile doctrines hindered the growth of the customs revenue; profitable lines of trade were closed, and prohibitive duties encouraged smuggling. The most prominent features were the imposition of special duties and the increase of the general import duties. Wines, spirits, sugar, tea, and coffee had all to pay extra charges, while the ten per cent. general charge of 1698 became fifteen per cent. in 1704, twenty per cent. in 1747, and twenty-five percent. in 1759. The pressure of the American War of Independence brought further additions in the shape of two separate five per cent. increases on the total duties existing on each article, with further extra duties on sugar and tobacco. Far greater, however, was the effect of the French wars (1793-1815), with the enormous outlay in which they involved the country. At six different times the import duties generally were raised, besides heavy special increases on particular commodities. The final result was that at the close of the conflict in 1815, the tariff contained nearly 1,400 items, and the rates were in many cases prohibitive.

In this unfortunate course of development but two periods of mitigation occur. Walpole’s long peace administration (1722-39) secured the carrying of some desirable reforms; such as the abolition of the general export duty, the reduction of the more onerous duties on raw materials and the adoption of a new valuation of goods.
*96 The opening of the younger Pitt’s ministry also promised well. The duties on tea and coffee were lowered (1784); the Eden commercial treaty with France (1786) enabled an open trade to be carried on between the two countries, and in 1787 the customs laws were consolidated. These measures, however, had but a temporary effect; the need of securing revenue made recourse to bad taxes necessary, when the productiveness of the better ones was exhausted. But from the fiscal point of view it is plain that a simpler and better regulated system would have been far more effective. In spite of the oppressive duties on almost every article, and the frequent increases of rates, the returns were not what might have been expected. In 1739 the yield was less than in 1702, and the growth up to the accession of George III. was slow.
*97

In the period 1820-1860 this complicated and uneconomic tariff system was completely transformed. The old prohibitive duties were removed; so were all the surviving export taxes. Raw materials, articles of food, and, finally, manufactured goods disappeared from the customs list, until the attention of the customs staff was concentrated on a small number of productive articles, taxed at suitable rates. Thus the customs system became nearly as simple as the excise, though, owing to the conditions of production, it included somewhat more articles. Notwithstanding this notable diminution in the number of dutiable goods, the yield was fully maintained. We are not concerned here with the history of this important reform, carried out in more logical and consistent manner than is usual in English legislation.
*98 Still less have we to consider the economic issues of the free trade contest;
*99 but it is in place to note the real cause of the financial success achieved. It was by singling out the fiscal element in import duties, and neglecting other considerations, that the revenue was maintained so close to its former level. The great number of duties created or increased between the Revolution of 1688 and the Battle of Waterloo had two grave financial defects, for (1) they were not really productive of revenue,
*100 and (2) they violated the rule of ‘economy’ by taking far more out of the taxpayers’ pockets than they provided for the State Treasury. The successive prunings of the customs tariff removed what had little life, and gave room for growth to the branches that remained. Cheaper raw materials made industry more effective; cheaper food left a larger surplus to be spent on enjoyments, and lower duties on the productive articles stimulated consumption, while they diminished smuggling. Consequently there was an apparently immense remission of duties without any real loss to the revenue.
*101 It must however, be noticed that the low rates of duty—those on tobacco and spirits excepted—were accompanied by the development of direct taxation, and the stamp (including the succession) duties. The emergency of war or any weakness in financial management
*102 was certain to lead to a return to higher customs duties and the extension of the list of ‘objects’ under charge.

Accordingly, in 1900 the tea duty was restored to the rate of 6
d. per lb., at which it had stood previous to 1890, and the customs duties on spirits and beer were raised to correspond with the excise. In the next year sugar was taxed at 4
s. 2
d. per cwt., with a number of equivalent duties on substitutes, while the long disused export duty was revived in respect to coal, 1
s. per ton being the rate. In 1902 the so-called registration duty on corn, which had been repealed in 1869, was reimposed. Thus the financial policy which prevailed since 1846 has within the last two years been decidedly modified by increasing the area of taxation.

The chief contributories to the customs revenue are now tobacco, tea, sugar, and spirits. The first mentioned article paid £12,839,000 in 1900-1, but the return fell to £10,365,000 in 1901-2. Tea has been increasing in yield for several years; in 1899-1900 it gave £5,552,000, in 1900-1 with an additional duty of 2
d. per lb. its yield was £6,275,000. The sugar duty for its first year (1901-2) produced £6,390,000. Imported spirits paid £5,133,000 in 1900-1. The other articles deserving notice are wine, coal, and corn. The wine duties have been falling off, their yield in 1901-2 was only £1,450,000, £38,000 less than in the preceding year. The export duty on coal during the year that it has been in force produced £1,314,000. The duty on corn is estimated to yield £2,350,000, and, if the expectation is realised, will rank fifth in order of productiveness. The present situation of the English customs tariff is of peculiar interest. Before the recent changes it seemed quite possible that the normal growth of revenue and the accompanying extension of direct taxation would have allowed of the removal of the tea duty, together with the smaller imposts on coffee, cocoa and dried fruits. The customs would thus have been limited as the excise is to taxation of intoxicating drinks and tobacco. At present the most prominent consideration is whether there will be a further extension of indirect taxation or a return to the simpler tariff of the end of the 19th century.
*103

As regards the particular objects of charge, the chief difference from the excise lies in the fact that certain exclusively foreign products are taxed. Tea, coffee, figs, raisins, currants, and wine are not British products, a position that fiscal regulations have also given to tobacco. Hence these commodities are contributories to the customs only. Beer and spirits come under both departments. An important development in fiscal expedients has led to what is practically a connexion between the two branches. The bonding or warehousing system, by which goods can be landed and stored free of duty, if they are placed under official control, is extensively used, and is now available in several inland towns, with the result that customs and excise become practically intermingled. Of the advantage of this concession it is needless to speak, but it is found rather difficult to extend it as far as traders desire, owing to the extra cost that it causes.
*104 At all events, the sacrifice imposed on traders and on the community is minimised by this means, especially when the very small number of dutiable articles is taken into consideration.

§ 4. France, on the whole, shows a greater difference from England in customs (
douanes) than in internal taxation. Not only are the dutiable articles much more numerous, but the aim of gaining revenue has never been the sole end in view. To reach the position of England, an entire recasting of the tariff would be necessary. All the points in which reform was carried out in the latter country remain for treatment. Food, raw materials, and manufacturers are all subject to import duties, often high in amount. The development of this system can be traced from the sixteenth century, but its most striking period was under the administration of Colbert (1661-1683), when the old export and transit dues were diminished and the import ones, especially those on manufactures, increased. The whole customs system was, however, affected by the absence of unity, the internal duties between the different provinces being just as heavy, and far more injurious to trade. These obstacles were finally removed by the Revolution, and the reform tariff of 1791, which is the basis of the present structure, was established.
*105 Unfortunately the liberal provisions of this measure were not continued in subsequent legislation. From the outbreak of war in 1792 to 1860, political rather than financial considerations governed the framing of tariffs in France.

The more liberal policy introduced by the Cobden Treaty (1860) prevailed for some twenty years. Under it both revenue and protective duties were lowered and the total yield was less.
*106 From £6,000,000 in 1859, the net customs revenue fell to £4,880,000 in 1869, but this, as Leroy-Beaulieu has shown, was due to the reduction in the duties on coffee and sugar. After the Franco-German war (1870-1) the need of revenue made the imposition of heavier taxation imperative. This coupled with the growth of protectionist sentiment led to the denunciation of the treaties of commerce and the re-establishment of corn duties in 1881 (increased in 1888 and 1891), and a general increase in duties. The customs revenue rose in 1872 to £6,000,000, in 1880 to £13,360,000, in 1885 to £15,440,000.
*107 The effect of the latest adjustments in the tariff are exhibited in the yield for 1892, which exceeded £18,000,000. The highest point was attained in 1898, when the customs and salt duty almost reached £20,000,000. The returns for 1900 show a decline to the yield of 1892.

One result of this system is the comparatively small amount of revenue received. Contrasted with the English system, where for many years a revenue of £20,000,000 was obtained without any direct pressure on the necessaries of life, or the raw materials of industry, the highest yield of the French customs has not reached £20,000,000, though the list of dutiable articles is a long one. Nor does the French customs revenue possess the expansive power of the English one, as proved in the great increase of the last year (1901-2). The smaller return may be partially due to the lower standard of living in France, the difficulties of supervision, and the different position of taxed products,
e.g. wine and tobacco are taxed solely by the customs in England. But the full explanation is to be found in the unproductive character of so many of the articles taxed. Thus, out of a total yield of £13,400,000 in 1887, but six articles produced more than £500,000 each, and they made up £9,800,000 or nearly three-fourths of the total. All the remaining goods produced only £3,600,000 or £400,000 less than the single item of coffee. The same feature appears in 1900. Out of the total of £18,000,000 only three articles—coffee, petroleum, wine—contributed more than £1,000,000 each, and their yield came to £7,700,000, or over 42 per cent. Only six others yielded more than £500,000 each. Thus the duty on nine commodities came to £12,500,000, or almost 70 per cent.
*108 Even of the productive duties many are seriously inconvenient, especially those on coal and timber. The corn duty, in addition to its protective operation, is very uncertain in yield, varying from £3,750,000 in 1894 to £668,000 in 1900. It is quite evident that the revenue is really supported from a small number of commodities, and primarily from coffee, which supplied £4,280,000 in 1893, and £5,050,000 in 1899. The duties do, it is true, bring in some revenue, and thus help to make the budget balance, but only at an excessive cost—a reform of the direct taxes and readjustment of the more productive duties would be the best course.

The absence of any due relation between the customs and the internal taxes is a further blot from the financial point of view. An import duty, uncompensated by an equal charge on the corresponding native product, causes a diversion of demand that is unprofitable both to the State and the consumers. Regarding such a method as—what it really is—a bounty on home production, we can see how an unnecessary cost is incurred through the system. More particularly is this true of the duties on raw materials, such as the various yarns, and on machinery and implements. Though such taxes have little direct financial significance they do much to dry up the source of all taxation by retarding the development of industry and the growth of commerce. While, then, the French customs system could hardly be as productive as the English with its duties on tea, tobacco, wine, and foreign spirits, it might yield a satisfactory contribution of at least £12,000,000, or probably more, by duties concentrated on a small number of commodities and this revenue would further be steadily increasing, as the relief to industry from the other remissions came to operate.
*109

§ 5. The Italian customs system, with its comparatively brief history, shows the same faults and illustrates the same general principles as the French one. From less than £2,500,000 in 1865, the return rose to £11,000,000 in 1889-90, but this increase, which was due to the imposition of much higher rates of duty, pressing heavily on raw materials and necessaries, has not been maintained. In 1893-4 it sank to £8,800,000, the highest point since reached being £10,400,000 in 1895-6, and again in 1900-1. The really productive articles are few in number. In 1883 sugar, mineral oils, and coffee contributed more than half (53 per cent.) of the total, or £3,200,000 out of £6,000,000. One important contributory in later years has been the corn duty, which yielded £2,550,000 in 1895-6, and nearly £3,000,000 in 1900-1. Like the similar French duty, and for the same reason, it varies much from year to year, falling to under £1,100,000 in 1898-9. The customs revenue has been kept up to its present point only by very severe pressure on the consumers generally, which, it should be said, is in keeping with the general character of Italian taxation. Reform therefore is not so easy as it would be in France; the high duties bring in a much-needed revenue, and remissions of taxation are not likely to be compensated by rapid recovery through increased consumption.
*110

The German system is specially interesting as supplying one of the best possible examples of the gradual absorption of smaller customs areas in a common unity. The conditions of the German States, each with distinct custom-houses that were so many obstructions to trade, led the wiser financiers to promote the establishment of fiscal unions between the States. These efforts brought about the series of agreements by which the
Zollverein, or customs union, including Prussia, Bavaria, Würtemberg, Saxony, Baden, and most of the smaller territories, was created, and which was the forerunner of political union. The immediate effect of the removal of internal restrictions was an increase in customs receipts, and a reduction of the proportionate cost of collection by one-half. The moderate rates of duty, derived from the Prussian tariff of 1818, assisted this expansion, which was hardly checked by some partial protectionist movements.

The customs union when transformed into the German empire at first continued its moderate financial system, and even (1873) made further reductions. But the need of revenue and the stronger protectionist sentiment brought about a much higher scale of duties in the tariff of 1879. That this important measure increased the receipts is indisputable; from £5,700,000 in 1878 they rose to £11,750,000 in 1885, to nearly £19,000,000 in 1890, to £20,750,000 in 1895, and reached £25,250,000 in 1900. Whether the mode adopted was the best one is not so clear. The corn duties, as in France and Italy, press on the working class, and, owing to the large home production, are decidedly uneconomic. The cattle duties have not even the advantage of yielding revenue. Still more objectionable are the taxes on wood, iron, and machinery in consequence of their effects on industry.

The limitation of the productive articles to a small number is, as we saw, also found in Germany. If corn, petroleum, and coffee were removed from the tariff, more than half of the revenue would disappear; and it is more than probable that a reform of the duties on these articles, accompanied by an adjustment of the inland taxes on commodities, would allow of a great curtailment, if not an entire removal, of the remaining items.
*111

The tariff systems of Austria-Hungary, Russia, and the United States are even more remarkable for their subordination of financial to political objects. Under the influence of a protectionist policy the revenue duties on tea, coffee, and sugar have in the last-named country been either abolished or cut down to a very low amount, while the duties on raw materials and manufactures are many and high. There is no approach to equality between the internal taxation and the customs tariff; on the contrary, the duties are designedly fixed so as to give a preference to native producers.
*112

§ 6. The broad result of an examination of the customs systems of different countries is to indicate that financial operations are greatly hindered, and their effectiveness diminished, by the intrusion of politico-economic objects. We may indeed conveniently divide import duties into two classes: (1) the small number that contribute to the revenue in a satisfactory way, and (2) the far larger number that only provide income as it were incidentally. The protective duties of modern societies are in fact often rather a mode of expenditure than of revenue, since by the increased cost of collection that they make requisite, and by their indirect efforts on the financial duties, they take more from the Exchequer than they bring in to it. The line is not always clearly drawn; the same duty may be at once revenue and protective, as in the case of the French and German corn duties; but this situation really indicates either that the protection given is ineffectual, or that a great deal of the tax is wasted by the virtual bounty given to the home producers. Whatever view we may take of the wisdom of a protective policy, we must allow that it means a certain outlay on the part of the State by the sacrifice of what would otherwise have gone to increase the revenue.

Another noticeable feature is the great prominence of import duties. Transit dues have been completely abandoned,
*113 and export duties have a very subordinate place. They do not exist in France, Germany, or the United States, and until the adoption of the export duty on coal by Great Britain in 1901, might be said to have been confined to countries at a lower stage. Brazil has a productive duty on the export of coffee, as Chile has on nitrates, but India takes the foremost position with its opium and rice duties. The English coal duty, with its yield of £1,300,000, must come next in order. Some of the English colonies also levy duties on the export of their staple product,
e.g. sugar in the case of the West Indian Islands.
*114 But these exceptional cases only tend to confirm the rule that under modern conditions imports are the most effective objects of taxation. Nor is it hard to see the reasons that have made them preferred. The excise taxation of commodities almost necessarily carries with it the use of corresponding duties on imports, and some imported articles are very suitable objects for imposition. Hence their employment for revenue purposes. The desire to encourage native industry accounts for the duties on many articles that are very decidedly unfit to be taxed, and especially for the use of import duties with respect to them. We may indeed trace a general movement by which the transit duty has been abandoned, and the once prevailing export taxes reduced to insignificance, while the import tax comes to the front.

There is a further movement in respect to the customs system that is deserving of notice, viz. its extension over, or application to, wider areas. The case of Germany has been mentioned, but France in the last century, Italy in the present one, and even the United Kingdom are additional instances.
*115 The latest example is the federation of the Australian Colonies into a single Commonwealth with a unified customs system in 1901. It is highly probable that further advances will be made in this respect. Proposals for customs unions of the British Empire, of Central Europe and of all the American nations, however they may differ in practicability, are all signs of the times, and show the direction in which movement will be made. To understand the real meaning of this tendency it is well to reassert a point previously noticed, viz. that financially considered, customs duties are but one form of the taxation of commodities, and that therefore the formation of a customs union is
pro tanto, the substitution of excise for customs. How far this method can be carried at present is not easily determinable, but it may be suggested that ultimately the boundary duties on imports will share the fate of those on the export and transit trades. The taxation of goods at the frontier, in spite of the improvements in the mechanism of collection, is a serious obstruction to trade, especially under modern conditions in which rapidity and despatch are of such great importance. Just as the town
octrois would be intolerable in England or America, so it may come to pass that a customs line between England and France will be too inconvenient to be endured. For the immediate future, however, the customs system must remain as a necessary element in the taxation of commodities that the heavy outlay of modern States makes indispensable.

§ 7. The problem of incidence—always a difficult one—is especially involved in the case of taxation of foreign trade. The various parties affected and the very complicated conditions that govern the course of unimpeded trade, must be taken into account before a full interpretation can be given; it is, besides, hard to obtain confirmation or correction of the results of deductive reasoning by appeal to statistics, as they do not throw much light on the really obscure parts of the subject.

To begin with the most primitive form. Who pays the cost of a transit duty? According to Adam Smith ‘duties of this kind are paid altogether by foreigners, and, perhaps, are the only duties that one State can impose on the subjects of another, without obstructing in any respect the industry or commerce of its own.’
*116 The loss must, he supposes, fall on the sending or the receiving country. This view, however, needs qualification. A transit duty will force trade to take another direction, or if this is impossible will reduce its volume, and thereby injuriously affect the transport industry and the
entrepôt business.
*117 For example, a transit duty in Belgium would be disastrous to the railways of that country and to the position of Antwerp as an international warehouse. If we recognise that a transit duty is an import tax without a drawback on export, we see at once that it is unadvisable for the same reasons that have led to the universal adoption of drawbacks.

The export duty is, generally speaking, open to similar objections. As employed in mediæval times, it was designed partly to tax those foreigners who used the staple product of the country, and partly as an impost on the producers, or owners of natural agents. It is evident that the incidence of the tax will vary according to the position of the article taxed. That the home traders will try to raise the price is certain, but their success in this endeavour will depend on (1) the extent to which outside competition is possible, and (2) the need that foreigners have for the article. Where several sources of supply exist, the effect of taxing one of them will be to turn demand to the others, and where increased price checks demand, it tends to bring about a fall. Thus it may be said that, in most cases, an export duty is chiefly paid by the country that imposes it. Unless the country has a complete monopoly of the product, and the foreign demand remains unaffected by a rise of price, the whole burden cannot be transferred to the consumers. This case is, it need not be said, rarely found,
*118 but any approximation to it will partly pass the tax to the foreign consumers. Still as a practical result, the bulk of the duty falls immediately on the producers of the taxed product, though it may be shifted by them to the owners of land, skilled labour, or fixed capital concerned in the business. A large number of export duties might even by diminishing foreign trade lower the rates of wages and interest generally.

The effects of an import duty have to be judged on the same principles. The usual incidence will be on the consumers of the commodity, but where no other market is open to the foreign producer, and where any increase of price arrests demand, the burden of the tax will be transferred to the producing country, with of course the same ulterior effects as those found in respect to export duties. It is also true that such a case is hardly in existence. The foreign producer has other markets, and demand is not often so sensitive; besides there is always the possibility of transferring labour and capital to other employments, should the pressure be sufficiently severe.
*119

The preceding considerations suggest that it is possible, in some instances, to place the weight of taxation on foreigners, and thus to levy what is substantially a tribute from them; but they also show that the probability of success in any design of the kind is very slight. It is further to be noticed that it is through revenue duties only that any advantage of the kind can be gained; a protective duty, if effective, brings in little or no revenue. That such duties are injurious to foreign countries is, we believe, unquestionable, but they are as certainly not advantageous to the revenue of the nation that imposes them. The corn duties of France and Germany may perhaps somewhat reduce the demand for Russian and American corn, and thus lower the price obtained by those countries, just as the English tea duty may have in part been paid by the Chinese; but in the former instance a corresponding excise duty on corn, if practicable, would add far more to the revenue with, on the whole, less sacrifice.
*120

A study of the question of incidence in relation to customs duties, therefore, leads to the conclusion, that while their real operation is often complicated and difficult to follow, the main burden falls on the country that imposes them, and that it can hardly ever hope, even if it should so desire, to shift any substantial part of its taxation to another nation or nations. On the whole the duties on imports must be regarded in common with the excise, and, where it exists, state monopoly, as one part of the system for taxing the consumption of wealth.